February 17, 2011

Banks Burn You With Hidden Charges

The recent crackdown on banks initially spurred fears that free checking and free credit cards would go the way of the dinosaurs. That hasn’t happened yet but like an air pocket that, when squeezed, pops up somewhere else, banks have found other ways to slap customers with hefty fees many of them more expensive than a monthly or annual fee would’ve been in the first place.

It used to be that you had to screw up to get slapped with a bank fee spending the money before it’s in your account or being late on a payment. But now, customers can do exactly what they’ve been doing for years and still get slammed by fees if they’re not paying attention.

“It’s become more difficult to avoid fees if you’re just sitting still,” said Greg McBride, a senior financial analyst at Bankrate.com. “It’s important to be proactive, not only in monitoring your account and changes you bank may be instituting but also searching out better alternatives,” he said.

Banks behaving badly is such a hot-button issue that one environmental group used it as a marketing gimmick for Valentine’s Day. Green Americaencouraged customers to dump their bank for a variety of infractions from “questionable lending practices and outrageous bonuses on the taxpayer’s dime to financial support of environmentally destructive practices to abusive fees.”

The good news is that banks must notify you when they’re making changes to your account, whether it’s a checking account or credit-card account. The bad news is that most of us skim those notices if we read them at all.

“The main thing is, don’t skim!” McBride said. “If they send you out a fee schedule, it’s because things have changed. This is a list of the different charges … think of it like a menu.”

And, if you think you’re safer because you set up electronic payments — think again.

“Electronic transactions are tricky It’s not at all transparent what the practices are,” said Rebecca Borne, senior policy counsel for the Center for Responsible Lending. “There seems to be a lot of opportunities for manipulation of the account.”

Here are some of the ways banks are burning customers with hidden fees.

Subtracting Electronic Payments Early. Wachovia customers who pay their bills online were used to having their payments deducted from their accounts and paid to the creditor on the same day. When the bank was taken over by Wells Fargo however, many Wachovia customers were surprised to learn that the policy had changed, and the funds were being withdrawn from their accounts two to five days before the payment was due.

So, even those customers who are diligent, scheduling payments after their paycheck is deposited, are now at risk for an unexpected low balance fee.

The unexpected fees caused such an outcry among former Wachovia customers, that Wells Fargo recently addressed the switch in a blog post: “At Wells Fargo, funds to pay your bills will be withdrawn from your account up to five business days earlierthan they were at Wachovia,” the wrote. “With Wachovia BillPay you selected and had a payment sent on a Pay Date. No longer! At Wells Fargo, you enter a Send On date. Funds are removed from your account the next business day after your Send On date.”

Ordering Transactions From High to Low. It used to be that banks posted transactions chronologically so, the order they came in is the order they are paid out. Now, many are choosing to process the transactions by size paying out the highest ones first, which increases the customer’s chance of getting snagged by a low-balance fee.

“Today, many large banks reorder transactions and post them from high to low deliberately because they can charge an overdraft fee for every transaction,” Borne said.

So, instead of maybe getting hit with one overdraft fee, the customer now runs the risk of being hit with multiple overdraft fees. The worst part, Borne said, is that bank disclosures about this are often vague. Some will just say “We can post your transactions any which way we like” without specifying how they were posting them. In fact, Wells Fargo was ordered by a California court to pay their customers $200 million for overdraft fees that resulted from reordering how they post transactions without clearly explaining to customers how they planned to do it ahead of time. When customers wrote a note to complain, that’s when Wells informed them that they were posting the transactions highest to lowest.

“We figure that overdraft fees are costing customers tens of billions of dollars a year,” Borne said. “And we think a significant number of those are the result of this reordering practice.”

Debit-Card Overdraft Fees. The whole purpose of a debit card was supposed to be that it prevented you from spending more than you have. But somewhere in the mid-2000s, Borne says, banks started routinely approving overdraft charges on a debit card and then slapping their customers with an overdraft fee. A few years ago, the Federal Reserve clamped down on this practice and told banks they can’t approve overdraft charges unless the customer consents. That’s when banks started sending out a barrage of “Sign up for overdraft protection or you won’t have a dollar to save your life when you need it” notices.

Those seemed like scare tactics for unnecessary services but Borne said they were quite effective a lot of customers signed up for overdraft protection.

Citibank never engaged in the practice of charging overdraft fees on debit cards, Borne said, and Bank of America responded very well to the Fed’s new rules, declaring they would no longer charge overdraft fees on debit cards. JPMorgan Chase and Wells Fargo continue to charge these fees, she said.

Raising the Minimum Balance Required. While everyone was watching to see if their bank started charging a monthly fee, many banks snuck up on them from behind raising the minimum required balance to avoid a monthly fee. If you keep the minimum amount in your account no fee. If your balance falls under that amount, BAM! They slap you with a fee.

The average minimum balance among banks that have a minimum balance requirement jumped 15 percent last year to $3,800 from $3,300 in 2009, according to Bankrate.com.

Returned Mail Fee. It’s important to inform your bank of an address change for your own protection but it can also cost you if you don’t.

“They could hit you for a fee if you fail to update your address and the mail is returned to them,” McBride said.

And, even when you do change your address — make sure the bank gets it right. One TCF Bank customer noted that just before his bank instituted a $3 fee for not having the right address, he found out that when he moved, they had input his address incorrectly.

Unfortunately, bank fees aren’t one of those inflationary items that rises and falls, McBride said. They’re more like the price of postage stamps: The only way to go is up.

The one saving grace for consumers, he said, is that it opens the door to competition, just like we’re seeing in the airline industry where some carriers are setting themselves apart by not charging baggage or other fees.

“Read any correspondence you get from your financial institution,” McBride advised. “Be prepared to vote with your feet and take your business elsewhere.”

The number of banks offering free checking accounts may be on the decline but it’s nowhere near extinct. A recent Bankrate.com survey found that 88 percent of accounts are still free.

Local banks, credit unions and online banks tend to be more likely to offer free checking than their big bank counterparts. Bankrate.com has a tool to help consumers choose a bank in its “Checking and Savings”section. And the Center for Responsible Lending offers a Shopper's Guide to Better Banking.

If you’d prefer to stay with your own bank, he said, ask about their policies for how to get fees waived or reduced.

The account might still be free if you can jump through a few hoops like direct deposit, using online statements or having other accounts with the same institution,” McBride said.

It’s a good idea to keep a cushion in your account and make sure it’s enough that you won’t get caught with insufficient funds no matter what trick banks pull. And, spread out transactions to avoid getting caught in any reordering web.

And, while any offer of “protection” from a bank is likely to trigger skepticism, it’s not a bad idea to sign up for overdraft protection if your bank is offering it for free, Borne said.

Bank of America, for example, offers free enrollment in overdraft protection but charges you a $10 “transfer fee” when you do overdraft the account. You might initially be inclined to say “Ah ha! You see? I knew it wasn’t free.” But do the math: Let’s say you paid three bills and the first one triggered an overdraft alarm. If you had overdraft protection, you’d pay $10 even though you overdrew the account three times; If you didn’t, at $35 a pop, that mistake would’ve cost you $105. Ten dollars doesn’t look so bad then, eh?

Now, obviously, it’s never desirable to overdraw your account. But given how many ways banks are trying to trip you up these days, $10 is a small price to pay for not reading the fine print from your bank.

On the back end, some companies are working feverishly to help banks find other ways of filling revenue gaps as an alternative to fee-ing their customers to death.

BillShrink.com recently launched StatementRewards, a program that offers targeted advertising and discounts through a customer’s bank statement. For example, if a customer shops at Safeway, they might get a coupon for 20 percent off with their bank statement. The merchant, in this case Safeway, would pay the bank a fee for that placement and the customer would get a coupon for a store they already shop at.

“Customers are motivated by rewards. They want to feel like they’re being rewarded or given something of value when they do business with you,” said BillShrink co-founder Samir Kothari. “I think banks are interested in finding other ways to offer that without having to fund it themselves.”

The most important thing for consumers is to remember that in this brave, new world of hidden bank fees no one is safe.

“It’s easy to think it won’t happen to you,” Borne said. “And then, one day, there’s an oversight and something does happen to you.”